During a lecture in a Modern Political Economy class this fall, I explained – as I have done to many students over my four decades in academia – that capitalism’s adaptation to globalization and technological change has paid dividends for society as a whole. She went on to argue that capitalism was a driver of wealth creation and that companies seeking to maximize long-term shareholder value made the entire economy more efficient. But many students in the crowded classroom were pushed back. “Capitalism leaves a lot of people and societies behind,” one student said. Another stated: “Adam Smith’s invisible hand appears invisible because it is not there.”
I know what you’re thinking: for undergraduates to express such thoughts is nothing new. But this was Master of Business Administration Students in the class in which I teach Columbia Business School. For me, these reactions took a while to get used to. Over the years, most of my students have embraced with passion the creative destruction that capitalism inevitably brings. Innovation and openness to new technologies and global markets have brought new goods and services, new companies, new wealth – and plenty of prosperity on average. Many master’s students come to Colombia after working in technology, finance, and other models of American capitalism. If previous statistics are a guide, most of our MBA students in the business world will end up in leadership roles.
if these Students have doubts about the free market, business leaders need to pay attention. An economy open to change depends on public support; Voters need to believe that the private corporate system is working to broad benefit. But many millennials and Generation Z Americans have come of age amid the turmoil that has made even MBA students give up on capitalism.
The more I thought about it, the more I could see where my students came from. Their formative years were shaped by the turmoil that followed 9/11, the global financial crisis, the Great Recession, and years of controversy over the disparate benefits of capitalism among individuals. They are now witnessing an epidemic that has caused mass unemployment and a breakdown in global supply chains. Corporate recruiters try to win over reluctant students by talking about their company’s “mission” or “purpose” – such as bringing people together or fulfilling one of society’s great needs. But these vague assurances that companies care more than their bottom line do not assuage the students’ discontent.
Over the past four decades, many economists—myself certainly included—have advocated capitalism’s openness to change, emphasized the importance of economic efficiency, and urged government to regulate the private sector with a light touch. This economic vision has resulted in gains in corporate efficiency and profitability and raised average American incomes as well. That’s why American presidents from Ronald Reagan to Barack Obama have often embraced him.
However, they have made some exceptions. Early in George W. Bush’s presidency, when I chaired his Council of Economic Advisers, he called me and other advisers to discuss whether the federal government should impose tariffs on steel imports. My recommendation against tariffs made no sense to an economist. I reminded the President of the value of openness and trade. Tariffs will hurt the economy as a whole. But I lost the argument. My wife had previously joked that people fall into two groups – economists and real people. Real people are responsible. Bush proudly identified himself as a real person. This was the political point he made: the disruptive forces of technological change and globalization Owns Many individuals and some entire geographies were left adrift.
In the years since, the political consequences of this turmoil have become more apparent – in the form of resentment, populism, and calls to protect individuals and industries from change. Both President Donald Trump and President Joe Biden have departed from mainstream economists’ preferred approach to trade, budget deficits, and other issues.
Economic ideas do not arise in a vacuum. They are affected by the times during which pregnancy occurs. The “let it tear” paradigm, in which the private sector is receptive to disruptive change, whatever the consequences, has won strong support from economists such as Friedrich Hayek and Milton Friedman, whose influential writings showed an intense dislike for big government, which had grown exponentially during the war The second world and the decades that followed. Hayek and Friedman were profound thinkers and Nobel Prize winners who believed that a government large enough to direct the economy from top to bottom could and inevitably limit individual freedom. Instead, they and their intellectual allies argued that government should step back and accommodate the dynamism of global markets and advanced technologies.
But this does not require society to ignore the problems that afflict individuals as the economy around them changes. In 1776 Adam Smith, the prophet of classical liberalism, praised open competition in his book Wealth of Nations. But there was more to Smith’s economic and moral thinking. previous thesis, moral sentiment theory, advocated “mutual sympathy” – what we might describe today as empathy. A modern version of Smith’s ideas would suggest that government should play a specific role in capitalist society – a role centered around boosting productivity in America. Possible (by building and maintaining extensive infrastructure to support an open economy) and progress opportunity (By driving not only competition but also the ability of individuals and societies to compete when change occurs.)
The failure of the US government to play such a role is one of the things some MBA students cite when I press them about their concerns about capitalism. It is not enough to boost average income alone. The lack of “mutual empathy” for people whose careers and society have been disrupted undermines social support for economic openness, innovation, and even the capitalist economic system itself.
The United States does not need to look back like Smith for models of what to do. Visionary leaders have taken action at major economic turning points; Abraham Lincoln’s land grant colleges, and Franklin Roosevelt’s GI Bill, for example, each had beneficial economic and political effects. Both the global financial crisis and the coronavirus pandemic are deepening the need for the US government to play a more positive role in the modern economy. In my experience, business leaders are not necessarily opposed to government efforts to give American individuals more skills and opportunities. But business groups in general are wary of extending government too much — and of the higher tax levels that doing so would likely result.
My students’ concern is that business leaders, like many economists, are too remote from the lives of people and societies affected by the forces of change and corporate actions. Executives’ focus on public business and economic concerns is neither surprising nor bad. But some business leaders emerge as the proverbial “anywhere” — geographically mobile economic actors unconnected with actual people and places — rather than “somewhere” rooted in real communities.
This charge is not entirely fair. But it does raise concerns that broad social support for business may not be as consistent as it once was. This is a problem if you believe, as I do, in the centrality of business to delivering innovation and prosperity in a capitalist system. Business leaders wishing to secure continued community support for organizations need not depart from Hayek and Friedman’s account of the benefits of openness, competition, and markets. But they need to remember more of what Adam Smith said.
As my colleague at Columbia University Edmund Phelps, the Nobel laureate, has emphasized, the goal of the economic system described by Smith is not only to increase average income, but collective prosperity. Increasing the potential of the economy should be a much higher priority for business leaders and the organizations that represent them. The Business Roundtable and the Chamber of Commerce should strongly support federally funded basic research that is changing scientific and technological frontiers, and applied research centers that spread the benefits of those developments throughout the economy. Land-grant colleges do this, as do agricultural extension services and defense research applications. Promoting more such initiatives is good for business – and will generate public support for business. After World War II, American business groups realized that the Marshall Plan for rebuilding Europe would benefit the United States both diplomatically and commercially. Likewise, they should advocate for the high-impact investment in the home now.
To address individual opportunities, companies can work with local educational institutions and commit their own funds to job training initiatives. But the United States as a whole must do more to help people compete in the changing economy — by offering group grants to community colleges, creating individual re-employment accounts to support re-entry into work, and promoting subsidies for low wages, and entry-level work in general. Through an extended version of the Earned Income Tax Credit. These proposals aren’t cheap, but they are much less expensive and more focused on helping individuals adapt than the increases in social spending that Biden’s legislation advocates for building back better. The steps I describe can be financed with a slightly higher corporate tax rate if necessary.
MBA students who question the benefits of capitalism see the different ways in which government policy ensures the survival of the system. For example, constraints on monopoly power have preserved competition, they say, and government spending during economic crises averted a greater disaster.
They also see that something is missing. Growing up amid a great deal of pessimism, these young people are looking for evidence that the system can do more than bring prosperity in general. They need proof that it can succeed without leaving people and societies to their fate. I hope that companies will continue to push for more globalization and enhance openness to technological change. But if they even want MBA students to keep working, they will also need to adopt a bolder agenda that increases opportunities for all in the economy.
This piece is excerpted from Hubbard’s book The Wall and the Bridge: Fear and Opportunity in the Aftermath of Turbulence.
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